Opinion
Bankruptcy Nos. 04-00694-JM, 04-00697-JM and 04-00734-JM Jointly Administered.
October 27, 2005
MEMORANDUM DECISION
Fulcrum Capital Group, LLC ("Fulcrum") filed a motion for the allowance of an administrative claim ("Motion"). The Court conducted a hearing on the motion on June 16, 2005. The Court requested additional information from Fulcrum regarding certain expenses included in the claim. Counsel for Fulcrum supplemented the record by filing his declaration on June 24, 2005, at which time this matter was taken under submission.
Fulcrum contends that it made a substantial contribution to the case which benefitted creditors. It asserts it is entitled to an administrative claim for its attorneys' fees and costs pursuant to Bankruptcy Code Section 503 (b) (3) (D).
The principal test of substantial contribution is the extent of benefit to the estate. In re Cellular 101, Inc., 377 F.3d 1092, 1096 (9th Cir. 2004); In re Christian Life Ctr., 821 F.2d 1370, 1373 (9th Cir. 1987). See also In re Consolidated Bancshares, Inc., 785 F.2d 1249, 1253 (5th Cir. 1986) (substantially contribution where services foster and enhance, rather than retard or interrupt the reorganization). There must be a demonstrable benefit to the debtor's estate or the creditors in order for the services to be compensable. In re Catalina Spa R.V. Resort. Ltd., 97 B.R. 13, 17 (S.Cal. 1989).
Mazon contends that Fulcrum's request should be denied because Fulcrum was simply acting in its own self-interest. Fulcrum points out that Mazon took a contradictory position when Mazon's own motion for an administrative claim under Section 503 was being considered. At that time Mazon asserted that "the issue is not whether the creditor was motivated by his or her self interest." Mazon's objection based on the issue of self-interest is rejected.
The burden of proof is on the applicant. In re Lister, 846 F.2d 55, 57 (10th Cir. 1988). Therefore, any uncertainty as to the benefit of a service performed must be decided in favor of the estate and against the applicant. In re Speeds Billiards Games, Inc., 149 B.R. 434, 439 (E.Tex. 1993). Additionally, a creditor will not compensated for efforts that duplicate the services provided by others. In re Alumni Hotel Corp., 203 B.R. 624, 632 (E.Mich. 1996).
Fulcrum seeks an administrative claim for fees and costs it incurred associated with: its motion for the appointment of a Chapter 11 trustee; opposition to Mazon's compensation; its disclosure statement and plan of reorganization; retaining a financial and management advisor; and for preparation of its claim.
Mazon objects to the claim on the ground that the services did not provide a substantial contribution to the case. He also argues that the time spent on various tasks was excessive and that the time records are inadequate because they are either lacking in detail or improperly lump time together.
As an initial matter, the Court rejects the request as it applies to Fulcrum's motion for the appointment of a trustee and its opposition to Mazon's compensation. The Court never ruled on the motion for a trustee and it added nothing to the case. Fulcrum contends that the motion compelled Mazon to move forward with a plan of reorganization, but that is merely speculation. Likewise, there was no showing that the opposition to compensation made a contribution to the case, let alone a substantial contribution, especially in light of the fact that opposition was also filed by the United States Trustee, the Creditors' Committee and Bank of the West. Furthermore, there is no showing that having Mazon receive a reduced salary for part of the case made a substantial contribution to the case.
On the other hand, the Court finds that Fulcrum made a substantial contribution to the case with its disclosure statement and plan of reorganization. Fulcrum seeks $132,866.00 in fees related to the plan and disclosure statement. Mazon argues that the amount requested for the disclosure statement is excessive in general, and in particular because significant portions of Fulcrum's disclosure statement allegedly were simply copied from Mazon's earlier filed disclosure statement. Mazon also contends that the time records from Fulcrum's counsel are inadequate because the entries lack detail and time spent on various services is not properly broken out. In other words, Mazon contends there is too much lumping of time records by Fulcrum's counsel.
First of all, in reviewing issues such as time spent on the disclosure statement and plan, the Court recognizes that the substantial contribution made by Fulcrum is not limited simply to the drafting of the initial documents, but must include its effort in getting the plan through the confirmation process, including responding to the concerns of creditors and an objection filed by Mazon. This becomes clear upon an analysis of the time spent before and after the filing of the disclosure statement and plan.
Mazon is correct that, when viewed by number of pages, Fulcrum copied substantial portions of Mazon's own disclosure statement and plan. Additionally, as compared to the $33,232.50 billed by Mazon's counsel for preparation of Mazon's documents (147.7 hours at a rate of $225.00 per hour), the amount sought by Fulcrum's counsel ($132,866.00) could appear excessive. However, a closer examination paints a different picture.
The billing statements show that in this category of time, counsel Nathanial Wood ("Wood") billed approximately 325 hours at a rate of $230.00 per hour for a total of nearly $75,000, while attorney Roger Meade ("Meade") billed nearly 95 hours at a rate of $525 per hour for a total of nearly $50,000. But, of that time, Wood spent 90 hours preparing the initial disclosure statement and plan, while the remaining time was spent toward confirmation. That amounts to an expenditure of $20,700.00 for the initial plan and disclosure statement. Likewise, approximately 20 hours of the time charged by Meade was spent in preparation of the initial documents, which amounts to $10,500. This shows that the majority of the time spent by counsel regarding the plan and disclosure statement concerned stewarding the plan through to confirmation. Additionally, the significant portions of the plan and disclosure statement, in other words, those portions that were not boilerplate and most concerned actual implementation of the plan, were unique to Fulcrum's documents. Therefore, the Court, except as noted below, is satisfied that the time billed by Fulcrum's counsel in preparing those documents and obtaining confirmation was reasonable and provided a substantial contribution to the estate.
That said, there are problems with the billing statements provided in support of the Motion. Fulcrum's disclosure statement and plan were filed on August 6, 2004. The efforts of Carol Kerr and Thomas Koegel in January, February and March appear to have had little to do with Fulcrum's plan.
Also, some entries provide no detail at all, e.g., Roger Mead's entry of July 12, 2004 for 1.5 hours and a charge of $787.50: "Telephone conference with Messrs. Argett, Penix and Drake" or Roger Mead's entry of 8/27/2004 for 1.5 hours and another $787.50: "Reviewing and revising draft of email to Mr. Orlik; reviewing electronic mail message from and sending electronic mail message to Mr. Argett; sending electronic mail message to Mr. Orlik." Entries like that do not allow the Court to determine whether the services provided actually concerned Fulcrum's disclosure statement and plan, for which the Court is allowing payment, or whether the services concerned a task for which compensation is being disallowed.
Fulcrum contends that the level of detail is similar to what was provided by Mazon's counsel in support of Mazon's motion for payment of his administrative claim. The Court notes that Fulcrum did not raise an objection as to the adequacy of those time records, whereas Mazon specifically contends that there are "many entries with insufficient descriptions." Furthermore, a review of the time records provided by Mazon and Fulcrum indicates that the lack of detail is much more prominent in the billing statements provided by Fulcrum.
The issue of lumping of time records is also problematic. Apparently the system used by Fulcrum's attorneys batches up time entries for a particular client and totals up the time for each day. As a result, the billing statements filed with the Court have a number of entries where counsel lists several tasks, but the amount of time spent on each task is not provided. The following time entry provides an example of the difficulty that arises when time is lumped together:
7/27/2004 Nathanial Wood 7.3 $1,679.00
Telephone conference with Ms. Kerr, Mr. Mead regarding strategy for plan of reorganization; telephone conference with Judge Meyers' law clerk regarding hearing on trustee; legal research regarding various issues relating to preparation of plan of reorganization; preparing memo regarding same; preparing and responding to various e-mail correspondence regarding stipulation to continue hearing on trustee.
The Court has already denied Fulcrum's motion as it pertains to time spent on its motion for the appointment of a trustee, and time spent regarding the stipulation to continue the hearing on the motion for a trustee likewise would not be allowed. But the entry above does not indicate how much time was spent on the trustee related matter, as opposed to time for Fulcrum's plan.
As the Court stated above, attorney Wood spent approximately 325 hours on the disclosure statement and plan, and attorney Meade spent approximately 95 hours. Since this was a substantial amount of time, it is not surprising that there are multiple time entries that lump time. Furthermore, some time entries are less problematic, such as Wood's entry for August 5, 2004, where all of the tasks listed clearly concerned the disclosure statement and plan. In other words, the Court's concern is with entries that lump time spent on the disclosure statement with time spent on tasks outside the scope of the disclosure statement and plan.
Fulcrum's attorneys have provided 20 pages of time entries that it believes are related to the disclosure statement. The Court recognizes that trying to segregate time entries is an imprecise business. The Court has reviewed each of the time entries. The comments above provide an indication of the type of analysis undertaken by the Court, though it is not practical for the Court to attempt to detail its analysis of each time entry and the adjustments it has made as a result. In resolving this matter, the Court has taken into account both the burden of proof that is on Fulcrum and the positive results of Fulcrum's efforts in obtaining confirmation of a plan that pays all creditors in full and was confirmed in a relatively short period of time.
In general, adjustments have been made as follows: 1) time entries before Wood's entry on 4/20/04 are not adequately connected to Fulcrum's plan; a reduction of $4,290 is made as a result; 2) the issue regarding a lack of detail primarily affects the entries by attorney Mead; there are more than 30 time entries by Mead that are questionable based on a lack of detail, with two examples provided above; a reduction of $10,500.00 will be made representing 20 hours at $525 an hour; 3) lumping primarily concerns the entries of attorney Wood; while all entries were reviewed, the Court notes there were approximately 60 entries by Wood of two hours or more, and of those, approximately 45 entries were for three hours or more; however, the Court is satisfied that only a half dozen contain objectionable lumping as explained above; a reduction of $2,300.00 representing 10 hours at $230 per hour is made as a result; and 4) an additional reduction of $2,070.00 is made representing nine hours billed by Wood on 10/26/04 and 10/27/04 for an ex parte application to shorten time; that application became necessary when counsel failed to use the proper local form, and the cost for that error must be borne by Fulcrum and not the estate. The total of these reductions is $19,160.00. The amount allowed to Fulcrum for the disclosure statement and plan is $113,706.00.
Fulcrum also requests payment of the fees of its consultant, Gene Huyapa ("Huyapa"). Huyapa submitted a declaration in support of the request. The only paragraph of the declaration that addresses the issue of benefit to the estate is as follows:
The services I provided included the following, among others: successfully negotiating with the San Diego Facility's landlord for an extension of the lease, and identifying alternative facilities for the Company; meeting with current employees to keep them from leaving the Company, as well as recruiting prospective employees for key positions at the Company; interfacing with key suppliers to allow for critical product deliveries pre-effective date as well as consistent supply post-effective date; meeting with possible co-packers both as a short-term production alternative for the Company as well as a long-term strategic alternative.
Billing statements are also attached to the declaration. However, they provide no useful information. They merely show Huyapa's fixed fee for the week, as well as various costs, such as travel and phone use. There is nothing to demonstrate when anything was actually done or how much time was actually spent on any of the above tasks. Furthermore, while the general descriptions of activities sound beneficial, there really is not an adequate record on which this Court could properly evaluate the benefit, if any, to the estate. Additionally, the time records are for periods that were prior to confirmation of Fulcrum's plan, as would be expected, but Fulcrum suggests that Huyapa's contribution, if any, might have been made primarily after the effective date and after Fulcrum had taken control of the company (See, e.g., Fulcrum's Memorandum in support of its motion, p. 10, 11. 14-16: "Once Fulcrum's Plan of Reorganization was approved, Mr. Huyapa was focused on ensuring the successful transition for the Company post-effective date.") Fulcrum has not met its burden of showing that Huyapa's services and the fees paid for them resulted in a "substantial contribution" to the estate.
Finally, Fulcrum seeks compensation for the fees incurred in preparing the Motion, as well as its costs. The costs pertain to each of the categories of services for which it has sought payment, in other words, costs related to its motion for a trustee, its disclosure statement and plan, etc. Rather than try to separate the costs by category, Fulcrum suggests it be compensated for its costs based on a percentage calculated by comparing the total time its attorneys spent on all matters related to the entire bankruptcy case to the time for which it can be compensated through this motion. The Court agrees that this is an equitable approach. The Court also finds that such apportionment should be made as to its request for fees in preparing this claim. In other words, its fees related to preparing this claim will be reduced to reflect that only a portion of the claim is being allowed.
The supplemental declaration of Mead addresses the issue of apportioning costs. Fulcrum states that it should receive 76.47% of all its costs based on comparing the $205,012.50 in fees sought in the Motion as compared to the $268,102.50 in total fees billed by counsel in this case. Fulcrum's costs were $20,936.96. Therefore, it requests $16,010.07 in costs.
Fulcrum also seeks $6,500.00 for preparation of this claim. It provided time records supporting $463.00 of that request, with the remainder being an estimate of time it expected to expend.
As explained above, a significant portion of Fulcrum's overall request is being denied. The Court is allowing $113,706.00 for the disclosure statement and plan. The amount sought by Fulcrum in its Motion was $205,012.50, but that includes $463.00 for preparing the Motion. Backing that amount out gives a total of $204,549.50. Therefore, excluding amounts related to preparing the Motion, Fulcrum is being allowed 55.59% of the total amount it requested.
The Court applies that percentage to the amount requested in preparing the Motion as well as to the overall costs requested. Fulcrum is allowed $3,613.35 for fees incurred in the preparation of this Motion. Additionally, it is allowed costs of $8,900.00.
Fulcrum is therefore allowed fees of $117,319.35 and costs of $8,900.00. All other relief sought by Fulcrum is denied.
The Court also rejects Mazon's contention that Fulcrum should be estopped from seeking more than $50,000 due to statements in its disclosure statement. The statements were merely estimates as to expected administrative claims and there is no indication that creditors were prejudiced by any alleged misstatements.
Counsel for Fulcrum is directed to submit a form of order consistent with this Memorandum Decision within 14 days of the filing of this Memorandum.